Q&A RE: Proper Financial Statement Presentation Following a 263(a) Study

Does this change of reporting the R&M expense for tax reporting purposes, per IRS statute, require that we conform with the same presentation / treatment for financial statement reporting?

Situation Background

ABC Company engaged Engineered Tax Services to perform a Repairs & Maintenance Study. The R&M Study identified approximately $15K of capitalized assets from 2005 that should have been expensed.

The result of the R&M Study will allow a tax return deduction by filing Form 3115, Application for Change in Accounting Method. Form 3115 will show a Section 481(a) adjustment in the amount of $15K that will deducted on the 2013 Form 1120S.

A question has come up regarding the proper financial statement presentation after an R&M Study has been performed. As a result of the study, we are changing the tax treatment from a capitalized asset to an expense. Is there any guidance that supports the proper GAAP financial statement presentation after an R&M Study has been completed? We no longer have a tax treatment for the assets that were identified in the study. Should we also eliminate the book treatment and present the expense from 2005 identified in the R&M Study as a reduction to Retained Earnings on the GAAP financial statements?

As an alternative, can the asset remain capitalized on the GAAP financial statements while being expensed as a 481(a) adjustment on the tax return?

Answer

The R&M study only addresses tax. Book can and probably will be different, assuming the change for tax is only a tax rule (such as accelerated depreciation) and not for something that has a parallel book rule (Please note that I haven’t seen the study and don’t know the reason for the change). For only a tax rule, tax only looks to book for the $500/$5,000 de minimis rule.

***The purpose of this post is for informational & discussion purposes only and is not intended to be used as tax advice. Answer provided by Kreig Mitchell, ETS Board Member and Tax Attorney.

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Engineered Tax Services

Engineered Tax Services

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